IHT planning: gifts from surplus income
If an individual makes gifts out of their surplus income, they can qualify for an unrestricted exemption - making inheritance tax planning very valuable. But how can they demonstrate their intention to HMRC?
Recap
Among the most valuable inheritance tax (IHT) planning stategies is the concept of making gifts from surplus income. Where HMRC accepts that a gift is made from surplus income, it is immediately exempt from iIHT - meaning there is no seven-year clock, and it doesn’t use up any of the nil-rate band. Contrast this with the rather measly £3,000 annual exemption, and it's easy to see why it is potentially very valuable.
Surplus
To be accepted as being made from surplus income, the donor needs to be able to demonstrate that they were able to afford the gift without diminishing their capital or standard of living. However, there is a further condition that must be met.
Regular
Gifts must be an intended part of normal expenditure; normal for the donor, not the average person. What HMRC wants to see is a regular pattern of such gifts and evidence of it. This is relatively straightforward if such gifts have been made year on year, but what if the donor dies after making only a couple of gifts?
Letter of intent
It's prudent for the donor to write a letter signalling the intention for the gift to form part of a regular pattern of giving when they make the first payment. That way, if they were to die after only making a single gift their executors can point to the letter as proof of the intention. This should prevent HMRC from being able to challenge the gift and charge IHT on it.
Our template letter can be used for this purpose. The letter should be completed where required and send it to the intended executors - not to HMRC.
Related Topics
-
Alternative education providers can protect VAT refund claims
HMRC has confirmed that some alternative providers of higher and further education can submit VAT refund claims following a Court of Appeal ruling, despite HMRC appealing the decision to the Supreme Court. What do you need to know?
-
Old IHT forms will be rejected
HMRC has stopped processing old versions of the Inheritance Tax IHT100 forms from 31 August 2026. Anyone reporting an IHT chargeable event involving a gift or trust will need to make sure they are using the correct forms. What do you need to know?
-
The tax incentive to do a thorough stock-take
The annual stock-take isn’t exactly your favourite thing to do. You know resources could be better spent elsewhere so you try to get through it as quickly as possible. Why might it be worth a little more of your time?